Once-iffy pot stocks are now investor favourites
Until recently, cannabis industry was hindered by a lack of capital
Call it the erosion of the Jeff Sessions valuation gap.
U.S.-focused cannabis stocks, once considered a risky play on a legally iffy product, are seeing heightened levels of investor interest while their Canadian peers drift back to Earth.
This is shrinking the discount for U.S. pot companies that was exacerbated in January when Attorney General Sessions said he’d reverse an Obama-era policy that helped states legalize recreational marijuana. As more states including Massachusetts and New Jersey push ahead regardless, investors are becoming more comfortable with the sector, buying up Canadian-listed companies with expanding U.S. businesses at the expense of pure-play Canadian pot stocks which had soared until this year.
“All this capital that has been waiting on the sidelines watched what happened in Canada and there’s maybe a little bit of FOMO (fear of missing out),” said Morgan Paxhia, co-founder and co-manager of Poseidon Asset Management LLC, one of the longest-running hedge funds in the cannabis space.
There’s plenty to miss out on, according to a recent analysis by GMP Securities. At $6 billion (U.S.) in sales, the U.S. pot market is already roughly as large as Canada’s targeted market size in 2022, analyst Robert Fagan wrote in a recent note. Fagan believes U.S. retail sales will reach $20 billion by 2022; that means the Canadian cannabis sector is trading at 6.3 times 2022 sales while the U.S. cannabis sector is trading at just 0.2 times. In aggregate, the U.S. sector could reach a public market value of $50 billion, or 10 times higher than current levels, he said.
Investors are starting to take notice, particularly of the multi-state operators that have ex- posure to more than one U.S. market. The top performing stock on the BI Canada Cannabis Competitive Peers index is iAnthus Capital Holdings Inc., which owns and operates cultivators, processors and dispensaries in six states. It has gained 144 per cent this year, including an almost 90 per cent increase since the beginning of April.
Green Thumb Industries Inc., which operates in seven states, has gained about 20 per cent since its June 13 trading debut and recently announced an C$80 million ($61 million) bought-deal financing. Pot retailer MedMen Enterprises Inc., with stores in California, Nevada and New York, went public on the Canadian Securities Exchange in May and did a private placement that it said gave it an enterprise valuation of over C$2 billion.
Investors are also snapping up Canadian companies that list on U.S. exchanges, showing growing comfort with the sector as a whole. Based in Nanaimo, British Columbia, Canada- focused Tilray Inc. began trading on the Nasdaq earlier this month and has soared 34 per cent since then. Tilray now has a market value of $2.1 billion, trailing only the three biggest Canadian pot stocks.
The U.S.-focused cannabis companies tend to trade on the small Canadian Securities Exchange because U.S. laws prevent them from listing on the big bourses such as New York Stock Exchange and the Toronto Stock Exchange. The CSE currently has 36 listings from U.S. cannabis and cannabis-related firms.
Private companies are attracting big investments too. Acreage Holdings recently raised $119 million, the largest private funding round ever closed by a U.S. cannabis company, according to industry publication Marijuana Business Daily.
“We’re seeing a broader pool of capital show up,” said Graham Saunders, head of origination at Canaccord Genuity Group Inc., which last year was the biggest dealmaker in the in- dustry. “We are very busy in the U.S. with a bunch of companies looking for a better cost of capital through the public markets, and we’re seeing a broader audience institutionally for investment into U.S. cannabis-oriented companies.”
Growth in the U.S. cannabis industry was hindered until recently by a lack of capital and a lack of qualified people, both prompted by investor discomfort, said iAnthus chief executive officer Hadley Ford, a former investment banker at Goldman Sachs Group Inc. and Bank of America Corp. That has changed with several incremental developments, including President Donald Trump’s endorsement of states’ rights and former Speaker of the House John Boehner, once a vocal foe of legalization, joining Acreage Holdings’ board.
“It’s pebbles on the scale,” Ford said. “There’s been no big boulder that’s come rolling down the hill but there’s been a lot of little tiny rocks that add up.”